What can Barack Obama do to fix the economy? Not much
By: Ben White
June 3, 2011 01:36 PM EST

President Barack Obama is heading into his reelection campaign with a flagging economy that appears incapable of producing the sustained job growth needed to push unemployment below crisis levels.

And there appears to be very little he can do about it, at least in the short term.

The political gridlock in Washington, the drag of a decimated housing market and the lack of a clear driver of faster growth beyond a newly inflated tech bubble have combined to limit the administration’s options and lock the economy into dismal and seemingly permanent weakness.

Here are five reasons Obama won’t be able to do much but hope and pray that this month’s dismal jobs report — which showed the economy created just 54,000 jobs in May — was a blip driven by transient factors, including the Japanese earthquake that disrupted manufacturing and temporarily high food and gas prices that spooked consumers and drained wallets.

No new stimulus:

Many leading liberal economists believe the current trend toward fiscal “austerity”— code for spending cuts — is exactly the wrong direction to take with an economy that remains this feeble.

Their prescription is for another massive stimulus program worth hundreds of billions of dollars that would pour money into the economy and employ many of the persistently jobless.

David Kotok, chief investment strategist at money management firm Cumberland Advisors, suggests that instead of extending unemployment benefits, the White House should announce a program to put people to work fixing roads, building parks and repairing bridges.

The trouble with any such suggestion is that the chances of the GOP-controlled House and the narrowly divided Senate approving a second stimulus are so small as to be essentially non-existent. In fact, Republicans on the Hill and in the presidential race continue to bash the first stimulus as a failure.

The GOP reaction to Friday’s jobs report bears out the continuing push for deficit reduction.

“It is time for the President to actively work with House Republicans to cut spending, get our debt under control and get America back to work,” House Ways and Means Committee Chairman Dave Camp said in a statement.

Housing in the tank:

Home buying and construction typically help drive the economy out of recessions and into periods of strong growth. Residential housing has contributed nearly 1 percent to GDP growth in recent recoveries, while all other sectors combined added 2.7 percent.

That growth driver no longer exists.

In fact, the massive collapse in the market after the real-estate price bubble burst means housing is now a major drag on growth, not a contributor. This helps explain why gross domestic product growth is stuck around 2 to 3 percent, not enough to create many new jobs and improve the president’s political standings.

“In the near term it seems that we are just going to continue to struggle along in terms of economic growth because we do not having the housing market anywhere near back on its feet,” said Kathy Bostjancic, director for macroeconomic analysis at The Conference Board, an independent research group that produces widely followed economic reports.

No driver of stronger growth:

Absent a resurgent housing market, there is no industry that appears capable of picking up the slack and driving faster economic growth.

Instead, one of the few emerging hot areas may be a retread of a previous bubble that ended in disaster: technology stocks.

LinkedIn, a social networking site for professionals, recently went public and saw its shares soar to as much as $120 despite 2010 profits of around $15 million, giving the company an absurd valuation of around $10 billion. The shares have since traded down to around $80, which still represents about 2,000 times the company’s actual earnings.

Meanwhile, Groupon, which offers group promotions for businesses, recently filed for a $750 million IPO despite losing nearly $400 million in 2010.

Manufacturing had been a bright spot in the recovery so far, but even that sector appears to be slowing given slackening demand abroad for U.S. produced goods.

“Manufacturing was leading the way and was a very nice surprise,” said Bostjancic of The Conference Board. “But that is very much related to growth overseas, and we are already seeing growth in the emerging markets starting to slow a little bit.”

No clear path to deficit reduction:

While liberal economists argue that deficits don’t really matter much right now, many moderate and conservative thinkers believe one key to restoring consumer and business confidence — and to keeping interest rates low — is coming up with a clear path to eliminating the more than $14 trillion national debt.

At the moment, though, Obama and the Congress can’t even to get close to a deal to raise the borrowing limit to cover debts the country has already accrued — much less blaze a path toward balanced budgets.

Wall Street rating agencies have warned that they may downgrade the nation’s blue-chip credit rating — which has historically been the strongest in the world — if more progress is not made toward lifting the debt ceiling.

Treasury Secretary Tim Geithner has said the nation risks a catastrophic default after Aug. 2, when emergency measures to keep making debt payments run out. Republicans say they don’t really believe him: Sarah Palin essentially called Geithner a liar. In exchange for raising the debt ceiling, they are demanding trillions of dollars in spending cuts, including major reforms to Medicare and Medicaid, programs sacrosanct to many Democrats.

Both sides privately say they hope for a deal on a deficit reduction framework and a multi-trillion increase in the debt limit well before the August drop-dead date.

But there are some signs Wall Street does not believe them.

Treasury yields remain very low, but the cost of insuring against a U.S. default have been rising. And there are early signs that big foreign holders of U.S. debt such as China and Japan are trimming back their holdings. Should foreign investors begin selling in bulk, rates on Treasury bonds would go much higher — as would the cost of borrowing for average Americans.

Any nascent economy recovery would be quickly choked off.

No big tax cuts:

The flip side to the liberal argument for more government spending is the conservative argument for across-the-board personal and corporate income tax cuts to boost spending and job growth.

Yet the administration has no appetite for such changes. Instead, it has based its deficit reduction strategy on targeted tax increases, or “closing loopholes,” as the White House prefers to call it. While there is almost certain to be agreement on extending the payroll and research and development tax cuts the administration has put forward, there is little belief that these will unleash a wave of job creation.

The administration also has said it wants to lower the overall corporate tax rate, but it has not yet released a plan to do so. Finding common ground with Capitol Hill Republicans on the issue could once again prove challenging.

“The president can improve the jobs environment short term, but I don’t think he will,” said Matt McDonald of Hamilton Place Strategies, an adviser to the 2008 presidential campaign of Sen. John McCain (R-Ariz.). “At a basic level, there needs to be more certainty for job creators, and a view that the U.S. has a long-term plan to deal with the debt. But the economic strategy they are left with at this point is the same as their campaign strategy: hope.”